Shutdown Pessimism Outweighs Vaccine Optimism
Energy and equity markets are giving back most of Monday’s gains in the early going Tuesday as shutdown pessimism seems to be outweighing vaccine optimism today.
New state-wide restrictions are popping up from coast to coast just ahead of one of the busiest travel weeks of the year, which will certainly put some more downward pressure on fuel demand, although the extent remains to be seen.
After being the weak link in the energy chain for months, distillates have had a strong performance this fall as inventories in several regions dropped to normal levels thanks to a slow recovery in demand and plummeting output from refiners. We can see evidence of that dramatic change in the chart of Midwestern diesel stocks below that shows inventories going from all-time highs in August, to an eight-year-low today. The annual harvest demand peak, and a pull from neighboring states to the West seem to be the major contributors to that rapid drawdown, with W. Texas, New Mexico, Arizona, Colorado and Nevada all finding themselves suddenly short on diesel supply. Cash markets suggest this will be a short-lived phenomenon with steep backwardation into December foreshadowing a recovery in supplies, and the seasonal demand drop, both coming soon.
Reuters is reporting that documents leaked from OPEC’s technical committee make the case for another three to six month extension of the current output cuts. We should find out two weeks from today if that plan is adopted by the cartel.
See this note for a listing of all the refinery closures/conversions announced around the world so far, which total roughly 1.7 million barrels/day of capacity. The exception to the current refining rule of weak margins appears to be China, as the country’s plants reached another output record in October amidst healthy domestic demand.
U.S. refiners are not so lucky, and are facing yet another new challenge as the ordered shut down of Enbridge’s line 5 puts more plants in MI and OH at an even greater risk of being unable to operate economically, although it could be a life saver for other refiners in the mid-continent who have the logistics in place to make a home for that newly distressed crude oil coming from western Canada.
The line 5 saga is just one of several pieces of political theater impacting energy markets since the election. RIN values had been on a tear since the renewable friendly Presidential victory was called, but D6 values have pulled back sharply this week after the EPA administrator said RIN values were “out of control” and that the agency would not release RVO targets for 2021 by the Nov. 30 deadline.
In addition, nominations for drilling in ANWR have been opened up, leaving just enough time for potential leases to be signed before the presidential inauguration. The flurry of events in the past few days suggests we are likely to see more moves from the democratically warring factions in the weeks ahead.
Click here to download a PDF of today's TACenergy Market Talk.
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Energy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
Click here to download a PDF of today's TACenergy Market Talk.
The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today.
The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.
IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year.
US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule. Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.
Chicken or the egg? Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands. Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.
Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check. The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior. The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.
As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.